Oil prices edged higher on Tuesday as traders reassessed whether Monday's sharp decline had prematurely priced in a diplomatic breakthrough that may not materialize. Brent crude climbed 1.3% to $84.89 a barrel, while West Texas Intermediate gained 1% to $81.11, recovering part of the previous session's losses.
The sell-off on Monday followed President Donald Trump's decision to postpone strikes on Iran and his assertion that negotiations were underway. However, Tehran quickly disputed that account, with Foreign Ministry spokesman Esmaeil Baghaei stating that no talks with Washington were taking place and no meetings had been arranged. Iran indicated that discussions with Oman were limited to commercial vessel routes through the Strait of Hormuz.
Adding to the uncertainty, another vessel reported being struck by a projectile near the Strait of Hormuz on Tuesday, underscoring that supply risks remain far from resolved. JPMorgan estimates that each month of disruption could add $7 to $8 per barrel to Brent, with a three-month disruption potentially lifting the monthly average to roughly $114. Goldman Sachs has outlined a scenario where Hormuz disruption pushes Brent above $120, though its base case sees prices easing to an average of $80 in the fourth quarter and $75 in 2027.
The market's reaction highlights an uneven risk profile. The downside from a genuine peace agreement could unfold gradually as shipping and inventories normalize. In contrast, the upside from another attack, failed negotiation, or renewed US strike could appear immediately, as traders have already seen how quickly geopolitical premiums can return.
Nikos Tzabouras of Tradu told The Wall Street Journal that earlier negotiations had failed to deliver a comprehensive agreement, and another diplomatic setback could revive hostilities and oil's geopolitical premium. This sentiment was echoed by analysts who noted that Monday's decline was not solely driven by diplomacy but also by supply-side fundamentals.
OPEC+ approved a September quota increase of about 188,000 barrels per day, reinforcing expectations that more supply could eventually reach the market. UAE output remains elevated, and non-OPEC producers are responding to higher prices. Anindya Banerjee, head of commodity research at Kotak Securities, told The Economic Times that while his overall outlook is unchanged, "the path and the timeline have shifted." He expects crude to cool into 2027 as supply outside the conflict zone expands and inventories rebuild once flows normalize.
For investors, the key takeaway is that the market may have removed the geopolitical risk premium prematurely. While a peace deal could push crude lower again, until one exists, the market remains vulnerable to sharp rebounds whenever events contradict its fragile peace narrative. As Monday's slide demonstrated, sentiment can shift quickly, but the underlying tensions in the Strait of Hormuz have not dissipated.
Related coverage: military constraints behind the pause and oil's 8% jump from earlier tensions.
This article is for informational purposes only and does not constitute financial advice.
